Husband can be held liable for wife’s stock market debt based on oral contract: Supreme Court

The Supreme Court on Monday ruled that a husband can be held jointly and severally liable for the debit balance in his wife’s stock trading account based on an oral agreement and the nature of their financial dealings [AC Choksi Share Broker Vs Jatin Pratap Desai]..A Bench of Justices PS Narasimha and Sandeep Mehta said that an arbitral tribunal can exercise jurisdiction over the husband in such cases under Bye-law 248(a) of the Bombay Stock Exchange2 Byelaws, 1957. “Under Bye-law 248(a) (BSE), the arbitral tribunal could have exercised jurisdiction over respondent no. 1 (husband) on the basis of an oral contract that he would be jointly and severally liable for the transactions undertaken in respondent no. 2’s (wife) account. Such oral contract would not amount to a “private” transaction that falls outside the scope of arbitration,” the Court ruled. .The key issue in this appeal is whether the husband of a woman could be made a party to an arbitration initiated by the appellant, a registered stockbroker. The dispute arose over a debit balance in the wife's trading account, for which the arbitral tribunal held both respondents jointly and severally liable. The respondents had opened separate trading accounts with the appellant-stock broker in 1999, but the appellant claimed they had agreed to operate them jointly and share liability for any losses. By early 2001, the wife’s account had a significant debit balance (loss) while the husband had a credit balance. On oral instructions from the husband, the appellant transferred funds from his account to the wife's account to offset the losses. However, due to a stock market crash, the debit balance increased significantly, leading the appellant to seek recovery from both respondents through arbitration. The husband contested the claim, arguing that he was wrongly included in the arbitration and that the transfer of funds was unauthorised under SEBI guidelines.The arbitral tribunal ruled in favour of the broker, holding that both respondents were jointly and severally liable for the losses.It relied on evidence suggesting that the husband was actively involved in the transactions and had agreed to cover the shortfall. The tribunal also dismissed the husband's counterclaim, reasoning that the financial dealings between the respondents indicated shared liability. It acknowledged SEBI guidelines requiring written authorisation for fund transfers but justified its decision based on past dealings and the couple’s financial relationship.When the respondents challenged this decision under Section 34 of the Arbitration and Conciliation Act, a single-judge of the Bombay High Court dismissed their applications. On appeal under Section 37, a Division Bench of the High Court overturned the tribunal's ruling against the husband and held that the husband should not have been included in the arbitration. The High Court reasoned that his alleged liability stemmed from a private understanding, separate from transactions conducted under the Bombay Stock Exchange (BSE) rules. It further held that oral agreements could not override official trading records and SEBI guidelines. As a result, it deemed the tribunal’s decision as lacking jurisdiction and containing errors in law.The stock broker then approached the Supreme Court..The Supreme Court held that the arbitral tribunal had jurisdiction over the husband under BSE Bye-law 248(a), which covers disputes between brokers and clients. Oral agreement between the parties, which established joint and several liability, was deemed incidental to the transactions conducted on the stock exchange. The Court emphasised that the husband’s involvement in managing both accounts and the financial dealings between the parties supported the tribunal’s jurisdiction.“Once the arbitral tribunal arrived at a finding that respondent no. 1 is jointly and severally liable for the debit balance in respondent no. 2’s account, which we have upheld above, Bye-law 247A in fact permits the withdrawal of the credit balance from respondent no. 1’s account……Although the arbitral tribunal has held that written authorisation for such adjustment is required, we find nothing in Bye-law 247A or in the SEBI Guidelines, on which this Bye-law is based, that mandates the same,” the Court said. .The Court found that the arbitral tribunal’s conclusion on joint and several liability was based on evidence, including affidavits and the conduct of the parties. The tribunal’s finding that the husband had orally agreed to be jointly liable was reasonable and not perverse, the apex court said. It also criticised the High Court for re-appreciating evidence, which was beyond the scope of a Section 37 appeal.Thus, it ruled in favour of the broker and upheld the decision of the arbitral tribunal. “As a consequence, the arbitral award dated 26.02.2004 is upheld in its entirety and respondent no. 1 is jointly and severally liable, along with respondent no. 2, to pay the appellant the arbitral sum of Rs. 1,18,48,069/- along with 9% interest p.a. from 01.05.2001 till date of repayment as has been directed by the arbitral tribunal,” the Court ruled..[Read Judgment]